Elon Musk became the richest man in the world last week, after Tesla stock reached an all-time high price of $880.
Telsa stock has performed tremendously well in the past year, delivering a 714% return to investors – which is remarkable.
For context, a return in excess of 10% a year is considered above average, especially when the S&P500 is typically used as a benchmark.
The growth of Tesla stock increased Elon Musk’s wealth to approximately $185bn, giving him $3bn more than Jeff Bezos, according to the latest Bloomberg Billionaire index.
The story was very different only a couple of years ago as Elon Musk seemed to be fighting an up-hill battle against a host of short sellers.
The belief of many in the investment world was that Tesla were doomed and that they were very likely not survive in the long term.
With that in mind, the last year’s performance of Tesla stock has been very surprising and it’s fair to say that even Elon Musk himself would tell you that he doesn’t really deserve to be the richest man in the world.
This article will outline 3 key reasons why Elon Musk doesn’t actually deserve to be the richest man in the world.
The first reason why Elon Musk doesn’t deserve to be the richest man in the world is that Tesla have never made a profit.
In the last 5 years, Tesla have made a loss of around $1bn on average.
Although the future potential of Tesla as a company is great, there’s a lot to be said for present profitability.
In fact, the value of a company is supposed to account for the present situation and the future possibilities, which arguably isn’t the case for Tesla.
Although a company can be loss making and highly valued, the extent to which Tesla is valued is insane.
The company currently has a P/E ratio of 1,692, which essentially means that investors are paying $1,692 for every $1 that Tesla generates in earnings.
If nothing changed (which is unlikely), it would take 1,692 years for investors to get their money back.
With that in mind, it’s absurd that Tesla is the most valuable car company in the world when they have no real track record.
To his credit, Elon Musk knows that becoming profitable is important.
He recently said that if Tesla didn’t start to make a profit that the share price would ‘get crushed like a soufflé under a sledgehammer’.
The second reason is that the resources at Tesla are minute when compared to larger car makers like Volkswagen or General Motors.
For instance, Volskwagen currently have around $65bn in cash, which is more than Tesla’s revenue & assets combined ($60bn).
It’s naïve for investors to assume that rival car makers won’t compete with Tesla in the same domains over time, which will inevitably reduce their ability to win market share.
According to Statista, Tesla had a global market share of just 0.85% in 2020.
With the large resources that the other car companies have, it would be fair to assume that this market share could be significantly reduce in the future.
Tesla are certainly vulnerable to future competition, especially when their financial situation isn’t as strong as their competitors.
Many would argue that Tesla is not really a car company but more so a software company, which in some ways is a flawed concept.
Nonetheless, it’s understandable what those people are trying to explain, much of the value in Tesla is in the interface used inside of the cars.
However, it is also naïve to assume that other car makers won’t team up with other tech companies like Google, Apple, Microsoft or Oracle.
The advantage that other car makers have is that they know how to make quality cars that last, which is something that Tesla have been criticised for.
The third and final reason is that Tesla is a trendy stock.
The company have received an enormous amount of media attention, which has logically spiked interest from investors, many of which are likely to be inexperienced.
There is little doubt that Tesla stock is in a bubble, similar to that of cryptocurrency bitcoin.
The stock has performed remarkably well and so investors are hoping to jump in on the trend, trying to double or triple their investment in a short space of time.
Tesla stock appeals to the common urge of ‘getting rich quick’, a phenomena that is likely to end in tears unless Tesla start to win market share and become profitable.
The result of this is that the stock price just goes up and up at an outlandish pace, diverging further and further away from a rational stock price.
As a consequence, it’s not so much that Elon Musk is delivering value to shareholders, it’s more that investors are driving up the stock price.
In summary, it’s not to say that it is Elon Musk’s fault that he became the richest man in the world, it’s just that he doesn’t particularly deserve it based on the position and performance of Tesla as a company.
Of course, Tesla has a lot of potential but much of that may not be realised as nothing is guaranteed in the future.
As an investment, Tesla should be considered high risk as the underlying value of the company is vastly lower than the current market capitalisation.
Investors should invest in Tesla with great caution and some awareness that they could lose a lot of money in the long run.